Your firm is contemplating the purchase of a new $720,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $720,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $75,000 at the end of that time. You will save $260,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $110,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the npv? Please show exactly how to do his problem. pls show how to do this step by step. discount rate of 10%

Explanation / Answer

Hi, If you like my answer rate me first...that way only I can earn points. Thanks Initial cash flow = $720,000 + $110,000 = $830,000 For year 1-4 Net income increase = ($260,000 - $720,000/5)*( 1-35%)= $75,400 Net Cash flow increase = Net Income + Depreciation=$75,400 + $720,000/5 = $219,400 Year 5 Net cash flow = $219,400 + $72,000 = $291,400 NPV = -$830,000 + $219,400 *(1.1^-1+.....1.1^-4) + 219400*1.1^-5 = $46,405

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